Fitch: Pricing, Margins and Online Capex Challenge EMEA Retailers
OREANDA-NEWS. Fitch Ratings says in a new report that price pressures, operating margin reset and digital/online development will continue to drive the EMEA food retail landscape in 2016. These are some of the conclusions addressing the key questions and themes raised during its recent EMEA Retail round tables and investor discussions in London, Paris, Frankfurt, Zurich and the Netherlands between December 2015 and March 2016.
The combination of subdued economic growth, uneven consumer confidence across the EU, high unemployment and persistently intense competition have all put pressure on credit quality; for example the struggles of UK retailer BHS and the risk of "Brexit" indicate the broad range of threats facing European speculative-grade non-food retailers.
In relation to food retail, markets such as France and Spain should see some price stability in 2016, although we expect other markets such as the UK to remain fiercely price competitive, as discounters continue to expand their businesses.
While volumes and sales are slowly recovering on the back of modestly improving consumer confidence, gross margins and cost optimisation remain critical supports to profitability in EMEA. Operating margins for western European-based operators such as Tesco have begun to stabilise, albeit at levels lower than pre-crisis. Fitch estimates the new sector median for operating margin at around 3%. This will have implications for both cash flow generation and funds for deleveraging in the next two to three years.
Heavy asset sales have provided the much-needed funding to reinvest in core markets or accelerate deleveraging; this is one key reason behind Fitch's decision to change Tesco's 'BB+' Outlook to Stable from Negative in April 2016, and keep Casino Guichard-Perrachon at 'BBB-'/Stable Outlook.
The continued boom in online shopping continues but the cost of development is high and many retailers are still making losses. However, European food and non-food retailers alike will need to continue to invest in these new channels, as consumers expect retailers to have all these digital channels available to them as part of their overall shopping experience.
In addition to our views on the sector, the report also addresses the following frequently asked questions:
-Will Consumers Spend More?
-Will Sales and Profit Margins Improve?
-How Will Payment Terms and Working Capital Evolve?
-Will Free Cash Flow Improve?
-Are Assets Disposals Coming to an End?
-Will Dividends be Cut or at Least Not Increased?
-Will European Food Retailers Further Reduce Debt and Leases, Resulting in Sustained Deleveraging?
-How is Online and Digitisation Changing Food Retail?
-Will Purchasing Partnerships be Credit Positive?
-Will Casino and Metro Remain Investment Grade?